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EXTERNAL EVENT RISK (OPERATIONAL RISK MANAGEMENT)

2017-08-14

How long shall we be reactive rather than being proactive? In ERM we need to be proactive by considering the possibilities of the occurrence of the events, even if remote, and develop strategies to manage them. The four strategies usually deployed to manage risks include:

Avoidance of Risk

One of the ways in which a business can manage its identified risk is to avoid it altogether. For instance, must an organization build in a highly flooded environment or in places that is ‘robbery prone’ or highly unsecured or on disputed land? This brings to the fore the issues of ‘risk appetite’ defined as follows:

'The amount and type of risk that an organization is willing to take in order to meet its strategic objectives’.

As an organization must you take just ANY risk because you want to meet your strategic objectives? Some organizations that have huge appetite for profits sometimes ‘close their eyes’ to certain risks until such risks crystallizes. To buttress this point, let us consider the following cases:

1.A bank purchased a residential property in Lagos mainland, pulled it down and built an ultramodern branch on the land. After completing the building, the bank now needed to link its property to the street (because it was a residential building, this access was not there initially) but found that the only link to the road was through the premises of another organization. It then approached the organization but the company refused to allow its premises to be used as a channel for another company, a bank for that matter, to link the street. The implication is that both the staff and customers’ cars and bullion vans could not have access to the bank. This situation lingered on for years and the bank continued to incur cost on the building which it could not open for business.

The question therefore is, which one comes first, is it the property or the access to the property, considering the use to which the property was to be put (a bank branch)?

2.Another one was where a bank also purchased a property and remodelled it to a branch. But when the bank was about to complete the renovation, a faction of the family that sold the land came to the premises to warn the bank that it should vacate the premises because they were the real owner. The dispute lingered on and the bank had to vacate the premises, after purchasing the property at a very huge cost. Almost ten years on, the property is still there, unutilized by neither the bank nor those who claimed to be owners. Is this stress and associated loss not avoidable?

3.There is a particular branch of a Tier 1 bank in Nigeria located very close to where commercial motorcycles (popularly called okada) park and pick passengers. Customers of this bank have been robbed severally not inside the banking hall but by the motorcycle riders who usually pick the customers after they must have carried out their banking transactions, moved a bit out of the bank’s sight and then stop to dispossess the customers of cash just collected from the bank. The branch is very standard and welcoming in its outlook but the commercial motorcyclists are surely a menace.

4.There are known cases where building (under construction) belonging to big organizations collapsed and there were casualties. It would be interesting to know what went wrong. Was there no functional risk management department in the organization?

Some business offices are located very close to illegal ‘garbage dumpsites’ where wastes are dropped by the public and the immediate environment of the business offices always stinks. Some branches are unreachable by customers during raining seasons while, inside some of the branches, staffs are literarily on vacation during raining seasons because there are only very few customers to attend to; they could not just gain access to the branch.

The question is ‘Must we build there’? If the appetite of the organization goes for it, then have we considered the mitigants and are the mitigants really sustainable?

There have been cases of unsustainability of branches and business offices which have led to the re-location and closure of such branches, mostly at very huge costs than what was initially planned. Aren’t these avoidable?

Therefore do we really conduct proper risk assessments before siting branches or business offices? Are the Risk Management departments usually carried along or is everything left for the branch development unit alone? The answer is that in practice; most of the risk management departments (in banks for instance) have not dropped the toga of Credit Risk Management. An average risk management department spends most of its time assessing credit. This is okay since credit is typically the biggest item in the balance sheet of banks. However, what ERM preaches is that a risk manager must in addition to credit risk, pay attention to operational, market, liquidity, compliance, regulatory, legal, reputation risks amongst others.

In order to mitigate some of the external events and other risks mentioned above, the risk management group should endeavor to visit branches to determine susceptibility of the branch location to risks of insecurity, flood, environmental and other related issues. This is better than leaving everything related to new branch opening to branch development departments.

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posted on 2017-12-28Bright Tetteh
Definition of "Risk Appetite"
In our Risk Alert of Monday August 14 2017, Risk Appetite was defined as the amount and type of risk that an organization is willing to take in order to meet its strategic objectives.
My humble addition to this definition is thus : Risk Appetite is as the amount and type of risk that an organization is willing AND ABLE to take in order to meet its strategic objectives. The Able in my definitions refers to the ogranization's ability(ie technical,financial, operational etc)to undertake such risk. For me willing might just be a wish not backed up by ability.
Regards,
Bright Tetteh
posted on 2017-08-16

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